As the price for some product increases from $4.00 to $5.00 per unit, quantity demanded decreases from 400 to 300 units per month. For this segment of the demand curve, the price elasticity of demand is
A) 7.
B) 9.
C) 1.
D) 9/7.
E) 7/9.

Question

Quizplus · Accepted Answer

Price elasticity of demand is calculated using the formula:

(price change / original price) ÷ (quantity change / original quantity)

Using the given values, we get:

(price change) = $5.00 - $4.00 = $1.00
(original price) = $4.00
(quantity change) = 300 - 400 = -100
(original quantity) = 400

(price change / original price) = ($1.00 / $4.00) = 0.25
(quantity change / original quantity) = (-100 / 400) = -0.25

(price elasticity of demand) = (0.25 / -0.25) = -1

However, price elasticity of demand is usually reported as a positive number. Therefore, we take the absolute value of the result, which is 1.

Since the price elasticity of demand is 1, we know that the demand is unit elastic. This means that the percentage change in quantity demanded is equal to the percentage change in price. In other words, a 25% increase in price leads to a 25% decrease in quantity demanded.

We can also calculate the midpoint formula for price elasticity. This gives a more accurate reading for elasticity when we are measuring changes in price and quantity over a larger range.

Using the midpoint formula, we get:

(price change) = ($5.00 - $4.00) / (($5.00 + $4.00) / 2) = $1.00 / $4.50 = 0.22
(quantity change) = (300 - 400) / ((300 + 400) / 2) = -100 / 350 = -0.29

(price elasticity of demand) = (0.22 / -0.29) = -0.76

Again, we take the absolute value to get a positive result, which is 0.76. However, we need to convert this to the nearest whole number, which gives us 1. Therefore, the price elasticity of demand is 1, and the answer is D.

As the Price for Some Product Increases from $4